What is procurement in a company?
Procurement is a critical business function. It encompasses a range of activities involved in obtaining goods or services. If you do it right and manage it efficiently, you will likely see your business’s profitability grow substantially.
The procurement process consists of every activity involved in obtaining goods and services. including sourcing, negotiating terms, making purchases, tracking when supplies are received, inspecting goods, and maintaining records of all the steps in the procurement process.
What are the types of procurement?
There are various ways to categorize procurement. It can be split into direct procurement and indirect procurement. This is dependent on the way in which the company will use the items that they are procuring. The procurement can also be categorized into goods procurement and services procurement depending on the items that the company is procuring.
Direct procurement is all about procuring the items that are required to produce an end-product. For manufacturing companies, this is all about procuring raw materials and components. For retailers, this is all about getting the items purchased from a wholesaler for resale to customers.
Indirect procurement is about sourcing items that are essential for day-to-day operations but do not directly influence the company’s bottom line. This can involve office supplies, furniture, advertising campaigns, consulting services and equipment maintenance.
Goods procurement is all about the procurement of physical items. However, even the purchasing of software subscriptions can come under this category. You can only really do goods procurement right if you engage in good supply chain practices and do supply chain management right. Goods procurement could be either direct or indirect procurement.
Services procurement revolves around procuring people-based services. This could involve hiring individual contractors, contingent labor, law firms or on-site security services. Just like goods procurement, services procurement could be either direct procurement or indirect procurement.
What are the steps in the procurement process?
Different companies have different procurement processes and there are different steps involved in all of them, depending on their needs. Here are nine steps that tend to be common across most procurement processes.
Determine the goods and services that the company needs
The business first needs to figure out its requirements for specific items or services. The need might be for a new item that the company hasn’t bought before, a restock of existing goods or a subscription renewal. The step generally involves diving into the minute details of what the business requires, like the precise technical specifications, materials, part numbers or service characteristics. You’d want to speak to all business departments affected by the purchasing decision so that you can make sure that the procured items accurately reflect the requirements of every department.
Submit purchase request
When employees or business groups have to procure a large amount of new supplies or services, they need to submit a formal purchase request. This request is also called a purchase requisition. A purchase request lets the company know that a need exists, typically through department managers, purchasing staff or the financial team, and even informs them about specifications like the price, time frame needed, quantity and other critical things for the purchasing team to consider. The department that handles the purchase will then be able to approve or deny the purchase request. If approved, the procurement team can proceed with choosing a vendor and actually making the purchase.
Evaluate and pick vendors
After getting approval, you’ll start searching for the best vendors and submit requests for quotes (RFQs). You need to be as detailed as possible with your RFQs. While assessing vendors, you should not concentrate only on cost, but also on reputation, speed, quality and reliability. A lot of companies consider ethics and social responsibility too because procurement is often intertwined with corporate identity. For example, a retailer that considers sustainability to be important would benefit from partnering with environmentally responsible suppliers.
Negotiate price and terms
You should get multiple quotes (at least three), examine them carefully, and then negotiate on them wherever you can. After you agree on the final terms, you should make sure to get them in writing.
Create a purchase order
Now you have to Fill out a purchase order (PO) and send it to the supplier. It should have the right amount of details to allow the supplier to identify the exact services or goods needed and fulfill the order.
Receive and inspect the delivered goods
You now have to accept the goods delivered and check for errors or damage. Ensure that everything is delivered according to the purchase order and is on par with or above what was expected.
Carry out three-way matching
Accounts payable needs to carry out three-way matching, comparing the purchase order, order receipt or packing list and invoice to make sure that the goods or services received match the purchase order. It is also carried out to prevent payment for unauthorized or inaccurate invoices. If any discrepancies arise, you should bring them up and have them resolved before you make the payment.
Approve the invoice and arrange payment
After ensuring that the three-way match is accurate, you should approve and pay the invoice. Your business must have a consistent invoice payment process through accounts payable that checks that payments match the invoice amount and due date. This helps you ensure that the invoices are always paid on time, so that you can avoid late fees and strengthen your relationships with your suppliers.
You need to maintain records for the whole procurement process, all the way from purchase requests to price negotiations, invoices, receipts and everything else. These can aid the company in reordering items at the right price in the future, and even help with auditing processes and calculating taxes.